EVOLUTION IN THE INDIAN BANKING SYSTEM
With nearly 47
Million internet users and a GDP rate of 6-7 per cent, India represents a
digital economy. India has proved to be the biggest market potential for global
players. This digital revolution is expected to generate new market growth
opportunities, jobs and become the biggest business opportunity for businesses
in the next 20 to 30 years.
There was an
ardent need for this digital transformation in the Indian Banking System during
the late 1980s. Digitalisation was mandatory in order to meet customer
expectations, book keeping and MIS reporting.
To fulfil the need of the hour, a committee was formed by the Reserve
Bank of India to introduce digitalisation in the banks headed by Dr. C.
Rangarajan, during the year 1988.
The banks have
needed to adopt disruptive technologies to improve customer service and ensure
unparalleled efficiency and service at all times. Banks have been adopting
face-to-face interactions with the customers to provide meaningful financial
services to the individuals and the businesses. However, this one to one
interface has changed since the emergence of new technology to meet the
evolving demands of the customers. Thus, branch banking changed to bank
banking. Core Banking Solution (CBS) enabled banks to increase the comfort
feature thereby delivering a promising step towards enhancing customer convenience.
Different Core banking platforms such as Finacle designed by Infosys, BaNCS by
TCS, gained popularity.
Core banking systems
and digitisation of important services are necessary requirements for banks to
provide innovative services. Digitisation has helped developments not only in
the operational systems of the bank or customer services, but also the new
capabilities and services that are provided to customers these days.
The onset of the
World Wide Web, truly revolutionised the banking sector and financial
institutions to think out-of-the-box in meeting their customers’ needs. This
led many banks to invest extensively in internet services and provide services
over and above those offered at branches. A major driver for this change was
the increasing competition among the private and commercial banks that started
to digitalise their processes so as to improve their efficiency and customer
service, thereby meeting the current pace of digitalisation.
Banks have benefitted in several ways by adopting
technological advancements. E-banking has resulted in reducing costs
drastically and has generated revenue through various channels. The customer
base has also increased because of the convenience in ‘Anywhere Banking’.
Digitization has reduced human error. It is possible to access any data anytime
from any nook and corner of the world.
As per The Avaya Banking Survey 2017, 51% of
Indians use online banking channels and 26% of Indian customers prefer
to access services via their bank’s website, and the same number would prefer
to use a mobile app rather than talk to a human agent.
RBI is the guiding
force for the banks in forming regulations and giving recommendations. Commercial
Banks in India have adopted technology by way of Bank Mechanization and
Automation with the introduction to MICR based cheque processing, Electronic
Funds transfer, Inter-connectivity among bank Branches. The implementation of
ATM (Automated Teller Machine) Channel has resulted in the convenience of
Anytime banking. Strong initiatives have been taken by the Reserve Bank of
India in strengthening the Payment and Settlement systems in banks.
According to recent
surveys, today’s customers prefer to maintain multi-platform interactions with
their banks. The number of times one visits the branch has reduced
substantially and most of the transactions are done online, bills are paid
online, cheques are deposited via mobile banking, etc. One of the major
innovations that had transformed the Indian Banking System was the evolution of
the smart phones era. This has helped transforming the traditional banking
system by the introduction of apps that are used for transactions and other
is actively promoting digital transactions. The launch of United Payments
Interface (UPI) and Bharat Interface for Money (BHIM) by National Payments
Corporation of India (NPCI) are significant steps for innovation in the Payment
Systems domain. UPI is a mobile interface where people can make instant fund
transfers between accounts in different banks.
Today banks aim to provide fast, accurate and quality banking experience to
their customers. Today, the topmost priority for all the banks in India is
to the RBI Report in 2016-17, there are 2,22,475 Automated Teller Machines
(ATMs) and 25,29,141 Point of Sale devices (POS). Implementation of
electronic payment system such as NEFT (National Electronic Fund Transfer), ECS
(Electronic Clearing Service), RTGS (Real Time Gross Settlement), Cheque
Truncation System, Mobile banking system, Debit cards, Credit Cards, Prepaid
cards have all gained wide acceptance in Indian banks. These are all landmarks
in the digital revolution in the banking sector. Online banking has changed the
face of banking and brought about a remarkable transformation in the banking
operations. Source: Banking on
Technology, Perspectives on the Indian banking Industry
Electronic Funds Transfer (NEFT) is the most commonly used electronic payment
method for transferring money from any bank branch to another bank in India. At
present there are 23 settlements.
Time Gross Settlement (RTGS) is primarily used for high-value transactions
which are based on ‘real time’. The minimum amount to be remitted through RTGS
is Two Lakhs. There is no upper limit.
Payment Service (IMPS) is an instant electronic funds transfer facility offered
by National Payments Corporation of India (NPCI) which is available anytime and
usage of Prepaid payment instruments (PPIs) for purchase of goods &
services and funds transfers has increased substantially. The value of
transactions through PPI Cards, which include mobile prepaid instruments, gift
cards, foreign travel cards & corporate cards & mobile wallets have
jumped tremendously from Rs.105 billion and Rs. 82 billion respectively in
2014-15 to Rs. 277 billion and Rs. 532 billion respectively in 2016-17. This is
a remarkable development in the process digitisation in the Indian Banking
Source: RBI Data and Dun and Bradsheet
These increase in the
number of online transactions and mobile apps’ usages clearly show the response
of the customers to the rapid digitisation process. According to surveys, Indians
prefer a digital approach to banking, and will not hesitate to protest poor
service. As far as the numbers are concerned, 37% of Indian respondents
will change banks if they had a bad experience. With a larger population in the
social media, the customers readily share their experience and ensure that
everyone is aware of what is happening with the digitisation process.
Today’s young and
affluent customers are not only looking for smart banking services, but also
for ethical investments that will go a long way in ensuring returns. This also
ensures the holistic development of the community at large. Like every other
service and sector today, the rapid advances of technology are set to take
humongous leaps in the banking sectors as well leading into various prospective
domains in the imminent future. The Indian Banking system is the early adopters
of disruptive technology. This will help us go a long way to ensure that banks
seamlessly manage this change and stay relevant and efficient in this dynamic
phase of development.
In this era of digitalisation, banks are increasingly becoming the
market places and each event is becoming a prospective opportunity. With a
plethora of channels for bringing together customers and the banks, the need of
the hour is to provide an integrated system of managing the customer life
cycle. According to a CII report, the Indian
Banking System is currently worth INR 81 trillion, and is expected to become
the fifth largest in the world by 2020.
The BFSI sector contributes about 40% of the revenue
for major IT companies. As digital technologies evolve around the concept of
data sharing over public networks on a number of devices, ensuring privacy and
security related with banks are the major concerns at all levels.
Many initiatives adopted by Indian banks are within
the social, mobility, analytics and cloud (SMAC) framework.
Social: Indian banks are offering real time money transfers apart from
improving customer interactions and personal branding. Banks such as Kotak
Mahindra (KayPay on Facebook) and ICICI (Icicibankpay on Twitter and Pockets by
ICICI Bank on Facebook) have enabled a number of banking services such as fund
transfers, account balance and transaction checking, and even recharging
prepaid mobile phones.
Mobility: Banks in India are considering the mobile first approach for
launching new application, as more than half of the total transactions that
happened in 2017 were on mobile phones. With the emergence of E-Commerce,
theirs is awareness among the public regarding the mobile applications.
Analytics: With advancement in technology and reduction in cost of its
application, man power, computing and analysis, banks are trying to integrate
high end analytics tools to the existing big data warehouse. This would help
banks to generate revenue and also lower the risk of being exposed to
Cloud: Banks in India are using public cloud to move applications such as
lead management, email services, and human capital management which tend to
fluctuate in volume. Though public cloud platforms provide the advantages
concerns of security, regulations and interoperability are preventing banks
from adopting public cloud platforms for mission critical applications.
Source: Frost and Sullivan Report
The major challenge of the hour is that the adoption
of digital technologies will impact the core processes of a bank at a much
deeper level. Security and privacy issues are the major barriers for digital
technology adoption in banks. Banks fear insecure application program
interface, confidential data leakage, and malicious attacks. The lack of proper
mechanism that decides on issues of ownership, accountability, and risks is
also acting as a major barrier. Banks are also exposed to internal risks
especially frauds by employees / employees in collusion with customers. The
fear of losing money in the online transaction which is highly prevalent in the
financial illiterate and the rural poor is a barrier to usage of e-banking.
Lack of adequate knowledge among the employees as well as the customers is also
a major setback which is preventing things from moving forward. These are few
challenges that the Indian Banking System needs to improve and thus would help
take things forward.
As we move forward, business analytics and Artificial
Intelligence (AI) has a potential to bring a major change. Robotics, enabled by
AI, is expected to be the future game changer in the banks. Many private banks
are planning to deploy Robots for customer service, investment advisory and
credit-approval process to improve the services and be cost effective in the
long run. Digital Banking will be the most preferred form of banking in the forth-coming
DIGITAL FINANCIAL SERVICES AND RISK
Digital financial services (DFS) are the expansion of
the delivery of basic financial services to the poor through innovative
technologies like mobile-phone-enabled solutions and digital payment platforms.
Digital channels can help drive down costs for customers and financial
institutions drastically. Financial regulators have realized the tremendous
potential of the DFS, by playing a crucial role in the financial inclusion and
by creating enabling environments for digital financial services.
The Reserve Bank of India (RBI) published its first
guideline on mobile banking in 2008, as soon as UIDAI was established the
Aadhaar numbers were integrated with bank account numbers and the mobile
numbers were also integrated sooner. It was post-2010 that there was a rapid
growth of the e-commerce sector in India. This led to the massive development
of the digital financial services and intermediaries. Eventually the mobile
banking and online transactions rose rapidly thereby helping the digitalisation
of the Indian Banking system.
The advent of new
technology usually leads to innovation in industry. Irrespective of the sector,
technological innovations are always adopted to make tasks easier and more
efficient. The introduction of credit
cards and ATMs has changed the process of Banking and Financial aspects of the
Nation. For the past few years there have been major innovations in the
financial sector, thereby leading to a tremendous shift in the way people
interact with the Indian financial system. Pursuant to the same, the Reserve
Bank of India has responded to these advancements to make sure that they do not
Digital payments have
already made it easier to manage money. The next evolution is driving financial
inclusion and improving financial health with digital technology. The digital
payments are making financial services more affordable, accessible and they have
the opportunity to drive financial inclusion and financial health for the
population worldwide. The digitisation of money, the
rapid expansion of internet access, and the adoption of mobile phones, have
created the perfect conditions to make financial transactions easier, secure
and affordable to save, spend, give and borrow.
The RBI clearly recognised the potential for a
tremendous increase in mobile banking and the opportunity of increasing
financial inclusion in the country, and made recommendations for “addressing
the consumer acquisition challenges and also the technical aspects”.
Recommendations for alternate channels of mobile registration such as ATMs,
uniformity in the mobile registration process across banks, and standardisation
and simplification of the MPIN generation process were made by the RBI. The two
major challenges identified are the customer enrolment related issues and
technical issues, even after the potential of mobile banking to improve the
The RBI identified three major ways of mobile banking
utilised by most banks as SMS, USSD, and application based banking. The
problems the RBI identified with the SMS method were that the service is not
encrypted, and that it may become inconvenient for customers to remember the
syntax required for the commands. The RBI conceded that application based
friendliness as well as security, but stated that developing these applications
requires a large amount of research and development.
The introduction of technology such as cloud computing,
mobile telephony, and an increasing popularity of the virtual world would lead
to significant changes in the way payments would be made in the future,
according to RBI. This would also enhance the possibility of the movement away
from cash transactions to electronic transactions, leading a ‘less-cash economy’.
The RBI held that its regulatory stance would be to promote innovation to
achieve the inclusion, accessibility, and affordability, while remaining
The introduction of online wallets has provided
consumers with a simpler and more efficient method to complete online
transactions. A circular was issued by the RBI in December 2014, outlining the
guidelines that these wallets must follow. In the circular, RBI defined three
types of payment instruments or wallets –
Closed wallets can be
issued by a company to a consumer for buying goods exclusively from that
company, such as Flipkart or Amazon. They do not need any sort of permission or
regulation from the RBI as they do not permit cash withdrawal or redemption,
and hence are not classified as payment systems.
Semi-closed wallets can be
used to purchase goods and services at clearly identified merchant locations
which have a specific contract with the issuer to accept the payment
instrument. NBFCs can issue semi-closed wallets which need to be authorised by
the RBI. The most commonly known online wallets (such as Paytm and Mobikwik) fall
under this category.
Open wallets can be
used for the purchase of goods and services (including financial services) at
any card accepting merchant terminal and can also be used for cash withdrawal
at ATMs. However, these can only be issued by banks with approval from the RBI.
Risk Management practices is relatively newer in the
Indian Financial Sector. But with the introduction of risk management the
efficiency of the services has increased substantially. With the increased
regulatory systems and the divergent technologies, the risk management
practices have changed dramatically and will further keep changing. Digital
payments and digital financial services will introduce new complexities with
the new entrants in the sector.
Most common and harmful risk includes System and
technology risk, agents lacking liquidity, transaction data security,
fraudulence, theft and robbery and unsafe fund transactions. Most of the risks
in the Indian Financial services are operational and have serious implications.
There are further few risks that the financial services should address in order
to become more dynamic and capable of responding. These are as follows –
Strategic risks should be
identified and cautious measures are to be taken to address them. Strategic
risks include – geopolitical, Fintech and other non-traditional competitors.
technologies to increase efficiency and effectiveness of risk management.
Enhance risk management
capabilities to address newer nonfinancial risks and challenges of regulatory
Manage capital and
There are risk management tools developed to identify
and generate solutions to address the uncertainty and prioritising the
activities thereby tracking risks.
There are two distinct types of risk tools: Two are
identified by their approach, Capital asset pricing model
(CAP-M) and Probabilistic risk assessment
(PRA), is the mainstay of project risk management.
These are classified by the quality and fidelity of information required for
their calculations. Market-Level tools use market forces to make risk decisions
between securities. System-Level tools use project constraints to make risk
decisions between projects. Component-Level tools use the functions
of probability and impact of individual risks to make decisions between
It is important to maintain the risk management
practices to enhance the efficiency of the digital financial services and also
provide and build trust among the customers. This would help take the digital
transformation in the financial services a long way.